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Social spending meets market discipline

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Kai Ryssdal: States and counties don’t have a lot of extra money right now. Same thing can be said for the federal government. So there’s more pressure than ever for them to get taxpayer’s money’s worth from the spending they do. President Obama, the state of Massachusetts and New York City are all testing a British idea to pay for social services. One that uses private investors, nonprofit groups and for-profit market discipline.

Alex Goldmark explains.

Alex Goldmark: Social programs often require a leap of faith. The government pays to retrain the unemployed in the hope that they’ll find jobs. It funds inner-city school programs in the hope of boosting graduation rates. It can take years to bear fruit. But what if the government paid for these services only if they produced results, without ever putting a dime of taxpayer money at risk? That’s the idea behind something called a pay-for-success bond.

The Brits call it a Social Impact Bond, and former investment banker Toby Eccles created the first one last year.

Toby Eccles: A social impact bond is a contract and it is a contract which is new and different for a very simple reason: It allows governments to try to pay for outcomes they want to happen.

In Eccles’ case, the specific outcome is cutting the number of ex-cons who return to crime. Right now in Britain, over half the men released from short prison terms end up back behind bars within a year. That poor track record makes it harder to find fresh government funds for rehabilitation programs.

Eccles: This solves that problem by using other people’s money to do that.

Here’s how the pilot project works: Instead of paying charities up front as it usually does, the British government asked Eccles’ nonprofit to manage rehab programs at one prison. Eccles raised $8 million from private investors to fund services like emotional counseling, drug therapy and job training for 3,000 short-term inmates. The government doesn’t pay a penny unless the plan works. The repeat-offending rate has to fall by at least 10 percent over four years before the investors collect.

Eccles: We are measuring the number of times that they get convicted post their release, and we get paid for the reduction in the number of offenses that our service provision creates.

The better the results, the better the pay out, up to 13.5 percent annual return for the investors. Not bad for doing good. Even if the government pays investors the top rate, it’s still bound to save money as the cost of jailing repeat offenders falls. And if too many ex-cons can’t stay honest, it’s Eccles’ investors who are on the hook.

Jeffrey Liebman: It’s basically a no-lose proposition for government.

Jeffrey Liebman is a professor at Harvard and former White House budget official. Now he’s studying how these bonds might work in the U.S.

Liebman: It’s really the perfect tool for these tight fiscal times where so many core services are also being cut.

The latest White House budget proposes $100 million for pilot projects using pay-for-success bonds. Massachusetts this month called for proposals, to use the new concept to reduce homelessness. Liebman says these can work for most social programs, as long as results can be measured.

Toby Eccles, adds, the new bonds finally make it economical for governments to invest in preventing social ills — not just cleaning up afterwards.

Eccles: The are a whole range of social issues where if we get better at preventing them, then prevention is cheaper than the cure.

Eccles says American foundations and investors are eager to finance pilot projects. And his nonprofit, called Social Finance, has opened a branch in the U.S. to get in on the action.

In New York, I’m Alex Goldmark for Marketplace.

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